CHALLENGE OF INFORMALITY IN HOUSING FINANCE

India is at the forefront of rapid urbanization, slum upgrading and micro credit efforts. UN
Habitat estimates indicate that there is a need for 2 million new homes every year in India and
a total of 40 million homes that need to be improved to provide safe, sanitary and permanent
housing.

However, the greatest need is faced by those households that are informally employed and
informally housed. These households cannot provide mortgageable collateral for a loan and
cannot provide third-party documentation of their earnings. The formal financial sector is
unable to serve them. Excluded from formal financing, many households delay or are unable to
make investments into their housing. The impact of this lack of investment has myriad social
and economic implications. Poor health, longer work hours, overcrowding, and distraction from
education.

Alternatively, many families who wish to improve their homes resort to using the informal
credit system of money lenders, often paying upwards of 60% annual interest. Micro lending
institutions acknowledge that some of their loans are originated as consumer loans or
enterprise loans, but are in reality used for housing improvements. This places a resource
burden on microfinance institutions and does not recognize the specific technical assistance,
product attributes and underwriting that should be in place for loans to housing. It also means
that loan tenors are short and interest high.

SEWA HOUSING FINANCE

Clearly informal sector families need customized forms of housing finance. SEWA1 Housing
Finance has been conceived specifically to serve this important and large market.

SHF’s target market is:

SHF is a logical outgrowth for its promoters SEWA Bank and Gujarat Mahila Housing SEWA Trust
(MHT).

1
The Self Employed Women’s Association (SEWA) is a member-based organization of poor self-employed women
workers. It has a membership of over 1,000,000 women across 7 states. For over 3 decades, SEWA has been
working with its rural and urban members to help them emerge out of poverty and improve their living standards
through a number of initiatives in microfinance, technical education in various trades, market linkages, housing,
natural resource management and so on.
SEWA Bank is a regulated for-profit urban cooperative bank with a social objective. The bank
provides financial services to population segments that otherwise would not have any access to
formal finance. These people would typically rely on financing through often abusive
moneylenders and loan sharks. SEWA recognizes the key reasons for formal financial exclusion
including
• irregular income
• lack of formal proof of income
• transactions too small to make traditional delivery methods feasible
• lack of traditional collateral such as formal land tenure for mortages

SEWA Bank, since its inception over three decades ago, has learned how to serve poor clients
and how to overcome these hurdles. The bank has crafted loan products, underwriting
practices, and community-based delivery models that have proven beneficial to clients and
profitable to the bank. SEWA Bank’s financial experience is thus the most valuable asset that
SHF has.

SEWA Bank has developed a growing portfolio of housing loans. Currently these loans
constitute approximately 18% of all SEWA Bank lending and equate to Rs. 19.75 crore ($4.05m
USD). SEWA Bank knows first-hand that housing loan products that are properly designed for
low-income households can be successful. Their foray into this market in Ahmedabad proves
that lack of title and employment informality do not necessarily equate to high risk of borrower
default. In fact, non-performing loans constitute less than 5% of the SEWA housing loan
portfolio. This vast knowledge is the base for further innovation that is reflected in the
organization and activities planned for SEWA Housing Finance.

Gujarat Mahila Housing SEWA Trust (MHT) is a non-profit housing assistance provider with the
mission to build sound housing and living environments for and with participation of poor
women in the informal sector and their families. MHT brings sound living environments to poor
women’s doorsteps through,
• Planning and constructing basic infrastructure and service facilities in informal and low-
income settlements e.g. in scope of the award winning Slum Networking Scheme;
• Building the capacity of community-based organizations;
• Building partnerships between MHT, urban local bodies and organizations of poor and
informal communities;
• Providing technical assistance for disaster-resistant low-income housing;
• Facilitating electrification of low-income households;
• Facilitating access to microfinance for housing and basic infrastructure;
• Facilitating access and providing training in the use of solar energy;
• Training and certifying low-income women in construction skills at the Karmika School
for Construction Workers;
• Advocacy for housing and infrastructure development and policies;
• Research and documentation of activities, programs and impacts thereof.
MHT has demonstrated impressive outcomes from collective community improvement efforts.
Over the last 9 years, MHT has helped slum communities make nearly Rs. 70 crore ($15.5m
USD) in improvements to individual homes and community infrastructure. However, MHT
knows first-hand what an impediment the lack of housing and infrastructure finance can
present to slum improvement efforts. The main constraint to their work is the lack of financial
mechanisms to leverage the assets of community members.

SHF thus represents a vertical integration among affiliated and compatible mission-oriented
entities, each of which, for its own reasons, cannot grow to be a nation-wide housing finance
entity itself.

WAY AHEAD

SHF will deliver its products and services in a community-based approach that incorporates
SEWA network organizations into its value chain. By doing so, it will have the type of personal
customer information and interaction that has proven necessary for successful micro lending.
This will be combined with a highly professionalized core organization and systems, which are
present in typical formal mortgage finance systems.

SHF is expected to launch by the middle of 2010 with four inaugural products, aimed at a range
of housing types and tenure configurations. These include mortgage products (for use in
conjunction with government production-oriented subsidies and tenure security), and non-
mortgage loans (for home and infrastructure improvements). By focusing initial activities within
communities that MHT serves, SHF can confidently establish and test its systems. Using the
SEWA network as a framework for expansion, SHF anticipates building up to at least 77
communities within the first seven years of existence. SHF plans to make over 37,000 loans in
its first seven years, converting 117 crore of resources into ‘bricks and mortar’ for the benefit of
nearly 150,000 people.

By creating SHF, SEWA Bank and MHT hope to not only lead the way into this under-served
market, but also to create a new model for responsible lending to those who have been ill-
served, or excluded entirely, from formal housing finance. SHF will have direct positive impact
in India, but also has global implications as a model for others.